Appirits (TSE:4174) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Appirits Inc. (TSE:4174) does use debt in its business. But should shareholders be worried about its use of debt?

We've discovered 4 warning signs about Appirits. View them for free.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Appirits's Net Debt?

The image below, which you can click on for greater detail, shows that at January 2025 Appirits had debt of JP¥1.77b, up from JP¥797.0m in one year. But it also has JP¥2.29b in cash to offset that, meaning it has JP¥527.9m net cash.

How Healthy Is Appirits' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Appirits had liabilities of JP¥2.18b due within 12 months and liabilities of JP¥1.18b due beyond that. On the other hand, it had cash of JP¥2.29b and JP¥1.78b worth of receivables due within a year. So it actually has JP¥708.3m more liquid assets than total liabilities.

This excess liquidity suggests that Appirits is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Appirits has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Appirits

The modesty of its debt load may become crucial for Appirits if management cannot prevent a repeat of the 69% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Appirits will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Appirits has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Appirits's free cash flow amounted to 41% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Appirits has net cash of JP¥527.9m, as well as more liquid assets than liabilities. So we are not troubled with Appirits's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Appirits you should be aware of, and 1 of them can't be ignored.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.